Reforming the Pell Grant Program Can Save Taxpayers Hundreds of Millions of Dollars

About the Author

Members of Congress are seeking ways to
cut wasteful spending while maintaining popular programs. Among the
programs administered by the U.S. Department of Education, the Pell
grant program stands out as being prone to both waste and fraud.
Streamlining the way information is collected for Pell grants could
save anywhere between $300 million and $600 million per year.

What is the Pell
Grant Program?

The Pell grant
program is the largest federal need-based aid program for
postsecondary students. President George W. Bush has requested over
$12.8 billion this year to fund some 5.3 million college students
in the upcoming year. To apply for a Pell grant, a student must
submit a variety of income and tax information to the Department of
Education. The information submitted determines eligibility and, if
a student is eligible, the amount of the grant. The maximum Pell
grant is $4,050 per year.

The program,
however, is susceptible to substantial fraud. According to a
General Accounting Office report, fraud accounted for more than
$600 million going to ineligible students over a two-year study
period, or about $300 million per year.

Why Is There Fraud?

There are two
basic problems with the existing system:

Students now have
a strong incentive to cheat the system. Students can misrepresent
their income and tax information (or their parent's income) to the
Department of Education with only a small chance of discovery.

Information is
rarely verified. About 30 percent of student aid applicants must
submit their (or their parent's) tax returns so that the income
information can be verified. Since these tax returns come directly
from the student, not the IRS, they can be easily forged.

One
Possible Solution

Rep. Sam Johnson
(R-TX) has recently introduced the Student Aid Streamlined
Disclosure Act of 2003 (H.R. 3613). This bill would still require
the student to submit the same tax information to the Department of
Education, but the information would be verified through IRS
records, rather than by the student submitting tax returns
directly. Such data sharing is a viable way to rid the Pell Grant
(and potentially other student aid programs) of waste and
abuse.

This reform would
save money in two ways:

Program fraud
would be reduced. If students know that the IRS will audit any
information they submit to the Department of Education, they would
be less inclined to give false income information.

The cost of
administering Pell grants would be significantly decreased. The
current system is cumbersome and expensive, as individual schools
(typically) must input by hand the information contained in the tax
returns - information already housed electronically at the IRS -
before validity checks can be completed.

A number of
estimates of the savings from such a change exist. One estimate
from the Office of Management and Budget estimates total savings of
as much as $638 million per year. Even if the savings were not this
great, this simple reform would likely save between $300 million
and $600 million per year.

Streamlining

To his credit,
President George W. Bush's budget proposals over the past few years
have all supported this kind of streamlining. To realize these
savings, however, Congress must act on the President's proposals.
Streamlining student aid application information is a simple way
for the federal government to reduce fraud, simplify operations,
and save taxpayers hundreds of millions of dollars every year.

Kirk A.
Johnson, Ph.D., is Harry and Jeanette Weinberg Fellow in
Statistical Welfare Research in the Center for Data Analysis at The
Heritage Foundation.